Stefan Wendt

Portfolio Selection of German Investors: On the Causes of Home-Biased Investment Decisions

Real-world portfolio composition is often far from being mean-variance optimal. One of the phenomena documented in investment portfolios is the home-bias effect, that is, investors hold a higher-than-optimal portion of domestic assets. Analyzing hand-collected data from annual reports of German mutual funds, we find strong evidence for home-biased portfolio selection in the years 2000–2003. Besides this we document a “Europe bias,” that is, equities from European countries are strongly overrepresented. Furthermore, bounded rationality of private investors appears to drive suboptimal portfolio selection. The behavior and skill of mutual fund managers seems not to influence the overall home bias.

Do key investor information documents enhance retail investors’ understanding of financial products? Empirical evidence

Purpose - – The purpose of this paper is to analyze whether key investor information documents (KIDs) provided by suppliers/issuers help retail investors to understand the key characteristics of financial products. KIDs are fact sheets composed to describe the characteristics of financial products in a brief, standardized and straightforward manner. Design/methodology/approach - – In the empirical analysis, the authors evaluate different versions of KIDs and examine whether they meet minimum requirements to provide benefits for consumers. Findings - – The empirical results suggest that subjects assess KIDs of suppliers/issuers merely as moderately appropriate to grasp the key characteristics of financial products. In contrast, neutral benchmark KIDs are generally evaluated as being superior to those of suppliers/issuers, which at best meet current legal requirements. Originality/value - – The authors argue that a major reason for these findings is consumer policy’s assumption of omnicompetent subjects in line with the neoclassical idea of a

Herding Behavior of Mutual Fund Managers in Germany

Herding behavior, i.e. the adjustment of a decision makers behavior, opinion, or expectations due to real or illusionary (social) pressures, can be explained by numerous behavioral finance models, such as the cascade model or contagion. However, unambiguous empirical results are rare, mainly due to differing methodologies used in previous studies. We analyze the buying and selling activities of the managers of German mutual funds that primarily invest in equities over the period from 2000 to 2005. Our dataset covers about 70 percent of the total investments of all German equity mutual funds. Our results reveal that there is considerable herding behavior when mutual fund managers face market-wide cash inflows or cash outflows. In addition, mutual funds that only invest in German equities display stock-picking herding behavior when selecting which stocks to invest in.

Are Investors Home Biased? Evidence from Germany

In most if not all countries the proportion of portfolio assets that investors allocate to foreign securities is clearly less than mean-variance analysis predicts. In Germany, for example, mutual funds hold only 66 percent of their investments in non-German securities while the latter represent almost 85 percent of the worldwide market value for bonds and 95 percent for equities. Even greater discrepancies exist for other financial intermediaries such as insurance companies or pension funds. Finally, the poorest portfolio diversification is exhibited by private German investors whose direct investments abroad only amount to 37 percent and 19 percent of their stock and bond holdings, respectively (for the year 2001: see Deutsche Bundesbank, 2001, 2004c).

Risk Assessment and Risk Management in Economics

Risk is a core aspect of decision-making in economic situations. This covers decision-making on both the corporate and the individual level, and also economic policy making including regulatory issues. However, risk is not limited to economic situations. Instead, risks may arise in every area of life which leads to the necessity of differentiated approaches to risk management and policy making depending on individual characteristics and risk exposures but also on respective situations in specific areas of life.The economic idea of risk management is based on the assumption that all possible states of the nature and the probability of their occurrence are known. Real-life economic situations, however, are characterized by ambiguity, which signifies a considerable lack of information regarding both potential outcomes and the probability of their occurrence. In order to mitigate the lack of measurability of ambiguity, simplifying assumptions therefore allow corporate decision-makers, policy makers and regulators alike to measure and evaluate risk and to apply risk models based on statistical loss distributions. Based on these models and distributions specific risk adjustment strategies can be implemented and monitored. To date, the academic discussion has to a large extent been characterized by these simplifying assumptions as well. Little attention has been paid to the risks that arise from the simplifying assumptions made in risk management. Our aim is to fill this gap in the literature. Specifically we focus on model risk, which follows either from (1) the use of a model that does not fit the situation (overoptimism), (2) the use of a model in a different way from or with a purpose other than that allowed (ignorance), or (3) the non-use of a model that would fit the situation (agnosticism).Model risk is treated only occasionally in the literature. However, in recent years, model risk has been discussed primarily in the context of financial institutions, such as banks, insurance companies and so on. With regard to the banking sector this development was fostered mainly in the context of supervision and regulatory measures included in the Basel accords (especially Basel II). Recently, models and their appropriateness have received increased attention even beyond a particular economic focus, namely in the political discussion of the stability of system-relevant banks and politically enforced stress tests of allegedly system-relevant financial institutions.In this chapter we analyse the causes of model risk and possible adverse consequences for stakeholders. Specifically, we focus on potentially inadequate decision-making and on illusion of control. In addition, we discuss possibilities to mitigate model risk on the basis of model risk management. Furthermore, we infer potential for further research on the adequacy of economic models.

Gefährdung der Wertschöpfung durch operationelle Risiken

Es erfolgt eine Bestandaufnahme der Berichterstattung zu operationellen Risiken in den Lageberichten der Unternehmen im DAX30 und MDAX, die nicht als Finanzintermediare zu charakterisieren sind, fur den Zeitraum von 2004 bis 2013 sowie eine Analyse, ob ein Zusammenhang zwischen der Berichterstattung zu operationellen Risiken und der Aktienkursentwicklung der Unternehmen besteht. Es zeigt sich zwar eine deutliche Zunahme der Anzahl der Nennungen von Begriffen zu operationellen Risiken, die Anzahl der Nennungen variiert jedoch deutlich zwischen den einzelnen Unternehmen und ist insgesamt als gering zu bezeichnen. Zudem ist kein statistisch signifikanter Zusammenhang zwischen der Aktienkursentwicklung und der Veranderung der Anzahl der Nennungen im Zeitablauf festzustellen.

Do mutual fund ratings provide valuable information for retail investors

Purpose Retail investors use information provided by mutual fund rating agencies to make investment decisions. This paper aims to examine whether the ratings provide useful information to retail investors by analyzing the rating migration and closure risk of mutual funds that received Morningstar’s mutual fund ratings from 2005 to 2012. Design/methodology/approach The research design differentiates between buy-and-hold investment strategies and dynamic investment strategies. To assess the information content of mutual fund ratings for buy-and-hold investment strategies, the rating migration based on the first and the last mutual fund rating during two-, four-, six- and eight-year horizons is determined. With respect to dynamic investment strategies, the number of rating changes per fund on a monthly basis during these time horizons is calculated. Findings Mutual fund rating persistence is low or even inexistent, in particular, during longer time periods. Only for lower-rated funds, the rating appears to indicate higher risk of fund closure. In addition, mutual funds face a large number of up to 38 monthly rating changes in the eight-year window. Originality/value Mutual fund rating persistence has hardly been analyzed for funds offered to retail investors so far. This paper clearly points out that because of the extensive rating migration and the high number of monthly rating changes, retail investors barely benefit from using mutual fund ratings.

Neue Geschäftsmodelle durch Digitalisierung? Eine Analyse aktueller Entwicklungen bei Finanzdienstleistungen

Die durch die Digitalisierung im Finanzdienstleistungsbereich gesteigerte Verfugbarkeit von Informationen bildet den Nahrboden fur neue Geschaftsmodelle von Unternehmen aus dem Bereich der FinTechs (Financial Services & Technology). Stellvertretend fur die neu entstandenen Geschaftsmodelle analysiert dieser Beitrag die Chancen und Risiken von Crowdinvesting, Robo-Advice und Social Trading und setzt sie aus Sicht der Verbraucherinnen und Verbraucher in Relation zu eher traditionell gepragten Finanzdienstleistungen. Die neuen Geschaftsmodelle erweitern das Angebot investierbarer Finanzprodukte und sind grundsatzlich geeignet, die (Informations-)Kosten der Verbraucherinnen und Verbraucher fur Finanzdienstleistungen zu senken. Diese (Kosten-)Vorteile werden allerdings durch den Verzicht auf Ruckkopplungsprozesse im Rahmen einer Finanzberatung, also durch das Risiko, bei der Selbst-Einschatzung fehlerhafte (Selbst-)Bewertungen vorzunehmen, erkauft. Fur Verbraucherinnen und Verbraucher, die in der Lage sind, ihre eigene finanzielle Gesamtsituation und die Risiken der angebotenen Finanzinstrumente gut einzuschatzen, konnen die neuen Geschaftsmodelle eine Moglichkeit eroffnen, ihre Rendite-Risiko-Position zu verbessern.

Chapter 10: Trust and Financial Services: The Impact of Increasing Digitalisation and the Financial Crisis

Abstract Current trends in financial services are characterised by two intertwined developments. First, increasing digitalisation provides opportunities to invest or raise money through channels that have not been available with more traditional financial services. Crowd-investing and social-trading platforms act as new intermediaries. Similarly, automated advice (robo-advice) is attracting increased attention. Second, the financial crisis of 2007–2010 is associated with a considerable decline in trust in financial institutions, even more so in Iceland, which had experienced a complete collapse of its banking system. Despite the evaporation of trust in their banking system, Icelandic consumers were largely bound to use Icelandic financial institutions because capital controls were in place since the financial crisis until 2017, which limited investors’ opportunities to, for example, diversify their portfolios internationally. As financial decisions are inherently risky and since financial services have the characteristics of credence goods, those who wish to use financial services need to trust financial intermediaries or the immediate contractual partner. The purpose of this chapter is to examine the role of trust in the context of increased digitalisation, and to discuss steps to establish trust in digitalised financial services. Among other items, we discuss the information requirements accompanying financial products and financial institutions, data protection and liability in the context of emerging digitalisation. Our work holds implications for individuals, financial service providers, policy makers and supervisory authorities.

Why Self-Commitment Is Not Enough: On a Regulated Minimum Standard for Ecologically and Socially Responsible Financial Products and Services

A broad variety of financial products and services is advertised as being ecologically and socially responsible. The market for these products and services, however, is characterized by a number of shortcomings. First, financial service providers largely make their own very general definitions of what is ecologically and socially responsible. Therefore, it is largely impossible to fully understand these products and services and to compare among them and with “traditional” products and services. Second, there is no level playing field for providers of responsible financial products and services, which hampers competition in the market. To tackle these problems, we suggest a regulated minimum standard for ecologically and socially responsible financial products and services which addresses clear and unambiguous criteria and how information about their fulfillment should be presented. This standard would allow consumers to understand and compare financial products and services, and it would provide a level playing field for intermediaries and strengthen competition.